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Affordability and value

The economics of pharm's new science

Overview

The pharmaceutical industry is buoyant.

Our 2015 High Performance Business (HPB) study of the pharmaceutical industry saw the whole peer group return to growth for the first time in four years. This growth is now forecast to accelerate in 2016 and hold over the next five years. In addition, after four years of falling operating margins, the peer group studied has also driven modest improvements in the last year. Furthermore, in 2015, 45 New Molecular Entities (NMEs) were approved by the Food and Drug Administration’s Center for Drug Evaluation and Research (FDA CDER) in the US—the highest annual total since 1996.

Set against this healthy picture, however, is a stark reality: The pressure is rising to make therapeutics more affordable, and it is also becoming increasingly difficult to get new therapeutics more widely accepted in the market. New science continues to be extremely exciting. But commercializing new science against the headwinds of affordability and accessibility and the movement towards better patient outcomes and economic value presents growing challenges.

Background

Accenture’s study of the biopharmaceutical industry is in its 11th year and has analyzed the long-term performance of “pure-play” pharmaceutical companies (those with more than 75 percent of their revenue derived from pharmaceutical products).

Our 2016 update is based on trailing 12-month Q3 2015 financials and analyzes 16 of the largest pure-play pharmaceutical companies in the world over an eight-year period. Collectively these companies had $423 billion in aggregate global revenue, representing nearly half the global pharmaceutical market by net sales. The results have been compared with our 2015 and 2014 studies to identify relative movements in the performance rankings. The analysis pro forma adjusts for the impact of major M&A deals (but not smaller bolt-on deals) and removes the impact of exceptional costs to reveal a normalized picture of ongoing core business operations.

A detailed analysis of historic financial performance averaged over one, three, five and seven-year timeframes is combined with consensus analyst forecasts to gain a forward-looking global picture of forecasted revenue growth from portfolio and new product launches as well as to gauge the impact of patent expirations and mature products.

Key Finding 1

Investors continue to reward new science.

There has been continued recovery in the first 11 months of 2015, with Enterprise Value (EV) up 6 percent – growing for the 5th year in a row. In addition, the Pipeline Replacement Revenue Ratio is at levels not seen since the patent cliff of 2012 and is forecasted to continue growing. This reflects the ability of recent and future launches to replace sales lost to products that are no longer patent protected.

What makes the difference? The companies growing and being praised by investors have business models that are largely focused on innovation in specialty indications.

Enterprise Value rose 6 percent in 2015.

The Pipeline Replacement Revenue Ratio has shifted markedly—back to levels not seen since 2012.

Key Finding 2

Growth has returned and is forecast to accelerate while margins have improved—but growth continues to be polarized at a company level.

In more positive news, the peer group has returned to positive growth in 2015 after three years of negative growth. However, a closer look reveals an increasingly polarized position between the High Performers and the rest of the peer group.

High Performers have stronger forecast growth and pipeline replacement revenue ratio as well as higher operating margins that have held up better in recent years. The rest of the companies in the peer group, on average, have lower growth forecasts and operating margins, indicating they still have work ahead to find a path back to sustainable profitable growth.

Six companies are outperforming their peers, with Eli Lillyjoining the High Performers for the first time.

These High Performers are also growing fasterthan the rest of their peers.

Key Finding 3

A­ffordability and market access will challenge new science as a growth driver.

In this tougher climate, there will be clear new launch winners and losers in the battle to command a share of fixed healthcare funding in increasingly crowded and price-competitive therapeutic categories. Successfully bringing new products to market will require more than just great innovations; pharmaceutical companies will also need to develop operating models that can turn new science into measurable delivered patient value.

There is a $50 billion “affordability gap” between analysts’ sales projections for NME launches 2015-20 and forecasts for developed market spending on pharmaceuticals.

Key Finding 4

In this more crowded and competitive marketplace, a company may not be able to differentiate itself on products alone. In addition to greater product strength in their portfolios and pipelines, the High Performers excel at the following operational attributes and capabilities:

Using M&A and collaboration to dominate in target disease areas

Develop new and more agile business models in response to market realities of affordability and consumerization

Maximizing productivity from R&D investment with smaller, more focused pipelines and the best science

Analysis

The hallmarks of being a High Performer

While growth is expected to accelerate in 2016, it continues to be polarized between a group of High Performers and the remaining peer group - which struggles at returning to sustainable growth. However, this innovation-driven growth comes at a cost and focus will soon be back on sliding operating margins and delivering on post launch sales expectations.

Sustained high performance will come from those companies that can drive operational change that can keep pace with innovation. Their challenge ahead will be turning science into value by developing new operating models that can deliver on the commercial promise of new launches in a changing healthcare economy.

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